About the only certainty that can be counted on in a Chapter 11 bankruptcy proceeding is the fact that there will be lots of ups and downs, twists and turns. Just as legal strategies must adapt to circumstances “on the ground,” so must communication plans.

363 asset sales which seek to sell substantially all of the debtor’s assets often pose strategic communication challenges that require flexibility and adaptability. In most 363 sales, the debtor enters into an asset purchase agreement with a party – the stalking horse bidder – that is subject to higher and better bids. Often, the stalking horse is a party that the debtor and its management would like to see as the ultimate successful bidder because, for example, existing jobs will be preserved, existing management may remain largely intact, etc. However, once the bidding process is opened up to other parties, the debtor has little control over which parties submit competing offers. While a new bidder may be perceived as likely to gut the company and slash payroll, management and its professional must be careful to run a fair process so as not to be seen as chilling the bidding process.

Indeed, while a particular bidder may not be in the best interest of management and existing employees, that bidder may be offering the greatest value to creditors. Therefore, because a debtor-company’s management owes a fiduciary duty to creditors, the debtor must be very careful that it is not communicating in a way that chills bidding or otherwise tamps down the competitive nature of a 363 auction. It is also very important to appropriately set the expectations of employees at the outset of a 363 sale process, so that there is not confusion and disappoint when the stalking horse is outbid. Bottom line: develop a communication strategy, but be ready to adapt.

The New York Times recently reported that certain U.S. senators are considering legislation that would impose restrictions on where a Chapter 11 debtor can file. Currently, a corporate debtor may file in its “domicile [state of incorporation], residence, principal place of business.” Because a significant percentage of corporations are incorporated in Delaware, many cases are filed there on that basis. However, many of those companies do not do business or own assets in Delaware – or other state which they are incorporated -  and therefore venue based on “state of incorporation” is often criticized as forum shopping. According to the report, senators, led by John Cornyn from Texas, want to restrict venue based solely on incorporation status, placing more emphasis on principal place of business and location of assets.

The Wall Street Journal reported today that debt-laden Jefferson County, Alabama is hiring FTI Consulting to assist it in restructuring its finances. The paper also reported that Nouriel Roubini’s consulting firm is anticipating $100 billion in municipal debt defaults. Time will tell if this is the leading edge of the wave of municipal debt defaults predicted by Meredith Whitney and others.

Given today’s 24-hour news cycle, the internet, and the public’s never satisfied appetite for news, businesses in bankruptcy do much better when they confront issues resulting from a bankruptcy filing rather than pretending they do not exist.  If customers know about a company’s bankruptcy, and they likely do, the company should demonstrate how it is dealing with its financial affairs rather than ignore its problems.

On February 17, 2011, Borders Group, Inc. filed Chapter 11 bankruptcy.  On the first page of Borders’ website, the company clearly communicates a reassuring message to its customers.  Specifically, the headline on the website states: “Borders Continues Business Operations As Normal.”  In addition, the company makes 5 critical points on the same first page: (1) Borders stores are open for business; (2) Borders is operating as usual, fulfilling online and in-store orders, (3) the customer rewards programs remain in effect, (4) Borders is honoring gift cards, and (5) certain stores will be closing but Borders will continue to maintain its national presence.  Customers’ important questions are answered directly, honestly, and conspicuously.

On the other hand, a recent Chapter 11 filing for a high-end retail furniture chain demonstrates a different approach.  This company’s website makes no mention of its bankruptcy filing whatsoever.  Are furniture warranties still in effect?  Are customer credits still valid?  What about goods in transit at the time of the bankruptcy?  Will they be delivered?  These questions, and others, remain unanswered.

In the words of famed UCLA basketball coach, John Wooden: “be prepared and be honest.”  In sum, that is a good communications strategy when in bankruptcy.  Borders seems to have taken this approach.

Twitter, Facebook, Blogs – all great tools for a company to promote its brand, products and services. But it goes without saying that before venturing into the virtual world, quality control measures must be put in place. Case in point: Kenneth Cole, who recently tweeted that the rioting in Cairo was due to the fact that the company’s spring collection had been released online. Enough said.

Baseball’s Texas Rangers are headed to Spring Training for the 2011 season.  The mood of the team and the franchise is upbeat.  The cold and dark days are behind them and the hope and promise of spring training is near.  The “cold and dark days” do not refer to the unseasonable Texas winter but instead the team’s 2010 bankruptcy filing and the near collapse of the franchise.

On May 24, 2010, the Texas Rangers filed for Chapter 11 bankruptcy.  Sources reported that the Rangers had an estimated debt of $575 million, including debt owed to players for back salaries.  As part of the bankruptcy process, the court ordered an auction process and the ultimate winning bidder was a group formed by Pittsburgh sports lawyer Chuck Greenberg and baseball Hall of Fame pitcher Nolan Ryan.

Under new ownership, the Rangers changed their focus from the courtroom to the baseball diamond and most importantly to reconnecting with their fans.  While in bankruptcy, the Rangers increased their communication efforts and focused on fan appreciation.  Team President Nolan Ryan strong-armed parking lot owners near the stadium into lowering parking rates and provided refunds to fans who were overcharged.  The team also focused on creating a family environment at the ballpark to increase fan enjoyment.

After winning the American League West division, the Rangers then defeated the Tampa Bay Rays and then the New York Yankees before falling to the San Francisco Giants in the World Series.  Ticket sales skyrocketed throughout the 2010 season and the team is offering several new packages for the upcoming 2011 season and even raising prices.

The Rangers’ success in the courtroom, on the field and at the ticket booth can be traced to one important strategy — effective communication during the team’s bankruptcy.  The players learned that they would continue to be paid, the fans learned that their season tickets would continue to be honored and the vendors learned that they would continue to be paid for goods and services rendered.  This communications effort, along with the team’s on-field success made 2010 a terrific season and 2011 look promising.  The bankruptcy process, because it was utilized effectively, gave the Texas Rangers a fresh start and a rehabilitated image.

The financial woes facing municipalities across the country continue to mount. Media coverage of this issue has increased as cities such as  Harrisburg, Pennsylvania and Hamtramck, Michigan have publicly raised the possibility of seeking relief from creditors under Chapter 9 of the Bankruptcy Code. While the predicted wave of Chapter 9 filings may be more media hype than reality, there is no doubt that municipalities around the country are carrying massive amounts of debt. So, what does Chapter 9 entail, and is it a realistic option for municipalities trying to restructure their debts?

Chapter 9 of the Bankruptcy Code allows “municipalities” – including cities and towns, villages, counties, taxing districts, municipal utilities and school districts, among other entities – to reorganize and refinance their debts. Similar to Chapter 11 bankruptcy, a municipality seeking relief under Chapter 9 receives protection from its creditors while in bankruptcy.

Chapter 9 differs from Chapter 11 in certain major respects, however. Significantly, The Tenth Amendment of the United States Constitution – which limits federal powers and preserves state sovereignty – curtails the bankruptcy court’s involvement in managing a Chapter 9 case, as opposed to its major oversight role in a Chapter 11. The bankruptcy court’s role in a Chapter 9 case generally involves: (i) approving a petition (i.e., determining if a municipal debtor is eligible for Chapter 9), (ii) confirming a reorganization plan, and (iii) overseeing implementation of the plan.

Ultimately, the purpose of a Chapter 9 case is for the municipal debtor to reorganize its finances pursuant to a “plan of adjustment” pursuant to Section 941 of the Bankruptcy Code.

Like any other entity faced with restructuring its debt in bankruptcy, municipalities must craft an effective communication strategy along with its restructuring strategy. From communicating with media to taxpayers, employees to bondholders, municipalities need to tell a compelling turnaround story to constituents.

Time – along with an effective communications strategy – can heal all wounds. Two years ago, auto manufacturing titans General Motors and Chrysler were on the fast track to liquidation. Now, GM has streamlined its business, shed liability, executed a successful IPO, generated profits, rolled out popular new models, and is the darling of Wall Street. Similarly, Chrysler has gained market share and is preparing for an IPO which is expected to take place in the second half of 2011. Given the companies’ post-bankruptcy successes, it’s easy to forget the doomsday scenarios suggested by many analysts and the companies themselves in the days leading up to automakers’ bankruptcies in the second quarter of 2009. However, good lawyering, the US Treasury as DIP lender, and effective stakeholder communications all contributed to lightning speed bankruptcies that ultimately positioned the companies for the apparent success they are enjoying today. What should we take away from the GM and Chrysler experience: that (a) despite short term pain, even iconic, consumer-oriented brands can navigate through Chapter 11 relatively unscathed, and that (b) consumers have short memories and will trend back to brands that offer good value post-emergence.

Welcome to the Bankruptcy PR blog, brought to you by D&H Strategic Communications. D&H is a strategic communications firm founded by PR practitioners and corporate bankruptcy lawyers that works exclusively for companies in, or on the brink of, Chapter 11 bankruptcy. We will be providing insights and analysis of issues in the corporate restructuring realm. We invite you to  check back often for updates to the blog.